CANarchy Adds Dallas' Deep Ellum; One More By Year's End?

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FILED JUNE 11, 2018

Dear Client:

Dallas, Texas' Deep Ellum Brewing Company is signing on with CANarchy Craft Brewery Collective, as CBN first reported, and the company announced. The partnership will "immediately provide resources for increased production and distribution" for the 7-year-old brewer, who has plans to expand production and build a new taproom, it stated.

The brewer, known for its Dallas Blonde and Deep Ellum IPA, was up almost 40% last year to produce about 45,000 barrels for the Texas market (they're trending closer to 55,000 this year). It was about the 65th largest craft brewer in the country. But the "vast majority" of its beer goes to a 20-mile radius outside the brewery.

As part of the deal, Deep Ellum founder John Reardon has rolled huge equity into the CANarchy platform. "The vision is for him to continue to be president of Deep Ellum, long term, to continue to drive that business," and also help lead the CANarchy platform, CANarchy spokesperson Chad Melis told CBD.

Recall, startup private equity investment group, Storied Craft Breweries (SCB), took on Deep Ellum as its first partner back in 2016. The brewer was to sell a majority interest to SCB that would allow Deep Ellum owner John Reardon to execute a "long overdue" buyout of partners and provide $8 million in growth capital. It ended up being a partial investment, John told CBD.

But SCB is out now. "That relationship has ended and they're not part of this deal," Chad explained.

And Deep Ellum needs capital imminently, with growth and capacity trends. "The brewery is operating at maximum capacity and is projecting 55,000 bbls of production in 2018," per statement. Expansion plans include a 60-barrel brewhouse slated to come online soon. The brewer is also building a taproom with 5-barrel brewhouse in Fort Worth, Texas, which is scheduled to open this year.

THE CIGAR CITY BLUEPRINT. What CANarchy has done with Cigar City has been pretty impressive, and no doubt inspirational for potential partners. YTD they're up 54%, bolstered by CANarchy resources. In the last year alone, Cigar City has almost double its markets, from 12 to 21. We remember when they could barely get enough beer to Florida.

But the Cigar City blueprint isn't all that attracted John to CANarchy, he told CBD.

The partnership "just felt right from a cultural standpoint," he said.

But also "the fact they can flip a switch on capacity for us, that's a real big thing. Even on the Fireman's side [CANarchy's private equity backing], meeting [managing partner] Dan Fireman, and the fact there's a family office ... it's not necessarily the usual private equity short timeline. It does seem like something that can work for us for the long haul."

WILL UTILIZE OB'S TEXAS BREWERY. To help alleviate Deep Ellum's capacity crunch for thirsty Texans, they'll brew some Deep Ellum at Oskar Blues' Austin location, which has an ultimate 100,000 barrels of capacity; currently, "only a percentage" is being utilized, for mostly Oskar Blues Texas beer.

But what about new markets outside of Texas?

NEW MARKETS? John told CBD there's "incredible run room" in the state still, as 85% of their beer gets consumed mere miles from the brewery. So no immediate push for outside markets.

That said, he noted that Oklahoma's laws are changing, and "Tulsa is just an extension of North Texas." He can also see the brand doing well in Florida, and Colorado, where of course CANarchy has significant resources.

That was part of the platform's intrigue, he said. "There is a model, avenues to get outside the state quickly." Of course, that takes investment, too. They'll expand when the time is right.

WHAT ABOUT DISTRIBUTOR OVERLAP? We asked if there would be any distributor alignment issues. Chad told us the deal "aligns very well," as 90% of Deep Ellum's distribution is with Ben E. Keith, with whom CANarchy is with statewide (of course, that leaves an unaccounted for 10% ...). "I don't believe we have to do a lot of adjusting," said Chad.

ANOTHER DEAL BY YEAR'S END? CANarchy has steadily added brewers to their platform (recall, the Cigar City deal was back in early 2016). So when can we expect the next to materialize?

"We met John and started conversations back in September of last year," Chad said. "So it's taken that long [for this deal] to come to fruition."

They're having talks with "many breweries," said Chad, indeed on the hunt to grow the platform. The primary priority is cultural fit.

He expects they'll "announce another addition before the end of the year."

CHICAGO'S BADERBRAU FOR SALE

Chicago's Baderbrau has apparently ceased operations, Chicago Tribune reported over the weekend. "Multiple sources" told the paper the South Loop operation is for sale.

Presumably, a potential buyer might want to keep the brand and pub going, "depending on the outcome of various discussions, sources said."

The brewery and taproom are still open and cans are still in the market, but story suggests product is just there to sell through. Our own e-mails to owner Rob Sama have not yet been answered.

You may remember the Baderbrau name for some ambitious projects. Just this January, we reported how the brewer was teaming with Lyft to make a beer called Five Star Lager. The brew was slated to hit dozens of Chicago bars, with coasters and other promotional materials boasting the $5 Lyft discount attached to its purchase.

The original Baderbrau beer was an award-winning pilsner, born in '89. Pavichevich Brewing Co., its original maker, went bankrupt in '97.

Rob Sama resurrected the brand in 2012 via a contract arrangement in Wisconsin. He made a close copy of the original pilsner, as well as a couple of other brands. In 2015, he opened a 25,000-square-foot brewery in Chicago -- "an ambitious project for a brand still forging a connection with its local audience," per Tribune. Indeed, there are now roughly 225 breweries in Illinois.

Until tomorrow,

Jenn, Jordan, and Harry

"Nobody in the game of football should be called a genius. A genius is somebody like Norman Einstein." - Joe Theismann

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